Czech central bank statement following policy meeting on Dec 21

PRAGUE, Dec 21 (Reuters) - The following is the Czech central bank (CNB) board's statement following its monetary policy meeting on Thursday, December 21:

At its meeting today, the Bank Board of the Czech National Bank left interest rates unchanged. The two-week repo rate thus remains at 0.50 percent, the discount rate at 0.05 percent and the Lombard rate at 1 percent. Five members voted in favour of this decision. Two members voted for raising the two-week repo rate to 0.75 percent.

According to the current forecast, inflation will stay above the 2 percent target for most of 2018. It will then return to the target at the monetary policy horizon, i.e. in late 2018 and early 2019. Following the November rise in interest rates, a continued increase in domestic market interest rates towards their assumed long-run level of 3 percent is consistent with the forecast. The rates are expected to approach this level at the end of 2019. The Bank Board assessed the risks to the current inflation forecast as being balanced and insignificant.

The outlook for growth in foreign economic activity this year and the next has increased compared to the assumption of the current forecast. This shift, coupled with a higher oil price outlook, has led to an upward revision of expected producer price inflation in the euro area this year and the next. By contrast, the increase in producer prices expected for 2019 has declined. The outlook for euro interest rates has shifted slightly lower in reaction to the European Central Bank's October decision to extend the asset purchase programme. The market outlook for Brent crude oil prices has increased compared to the forecast assumptions as a result of the extension of the agreement of oil producers to curb production until 2018. The outlook for the euro-dollar exchange rate is almost unchanged.

In the fourth quarter so far, domestic inflation has been in the upper half of the tolerance band around the Czech National Bank's 2 percent target. In October and November, the inflation forecast materialised in terms of both the recorded figures and their structure. Core inflation and food prices are still the biggest contributors to inflation.

The annual growth of the Czech economy accelerated further to 5 percent in the third quarter, also in line with the forecast. All expenditure components contributed to the rise in domestic economic activity, in particular household consumption. Its continued robust increase reflects solid wage growth and ongoing employment growth. A higher contribution of investment, especially in machinery and equipment, was also recorded. This may have a favourable effect on future productivity growth.

According to monthly indicators, industrial production and retail sales continued to rise apace. In addition, construction output recorded a slight recovery. The previous long-running decrease in civil engineering output dissipated. The economic sentiment of both households and corporations remains high. These indicators suggest continued robust economic growth at the close of this year.

Labour market indicators remain very strong. Employment rose further in the third quarter in connection with the ongoing increase in labour demand. Unemployment continued to fall to new historical lows. In the fourth quarter so far, the same has been true of the share of unemployed persons. A shortage of available labour force coupled with high labour demand led to a further sizeable increase in job vacancies. However, the increase in average wages moderated somewhat compared to the previous quarter.

To sum up the important facts about recent developments in the Czech economy, GDP growth in the third quarter and inflation in both October and November were in line with the forecast. The share of unemployed persons in the fourth quarter so far has also been very close to the forecast. By contrast, the average wage rose more slowly in the third quarter compared to the forecast.

The Bank Board assessed the risks to the current inflation forecast as being balanced and insignificant. Thus, the upside risks identified at the November monetary policy meeting have not materialised so far. These risks are connected with the possibility of slower-than-forecasted exchange rate appreciation due to koruna market overboughtness and the possibility of stronger domestic inflation pressures. However, materialisation of these risks in the future cannot be ruled out. Overall, the timing of further steps in raising interest rates remains conditional on the evolution of all key macroeconomic variables, including the exchange rate of the koruna.

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